Company and shareholder disputes: Derivative claims

Company and shareholder disputes: Derivative claims

In my last article I wrote about minority shareholders claims. I looked at company disputes from the perspective of remedies available to shareholders as individuals. Minority shareholder claims, however, are useful in disputes between the shareholders. Further, they are most appropriate where the injured shareholder wishes to leave the company.

There will be situations where a shareholder is not in dispute with his fellow shareholders, yet believes he may still have suffered prejudice due to the mismanagement or misconduct of a director. The shareholder may also not want to leave the company, but still may want action taken against the director. In this situation it may be more advantageous for the shareholder to investigate a derivative claim.

What is a derivative claim?

Section 260 of the Companies Act 2006 allows any member of a company (shareholder) to pursue a claim against any director of that company who has breached their statutory or common law duties. These claims are unique in that they are not brought on behalf of the shareholder in question; instead they are brought on behalf of the company (hence the name derivative claim).

Usually where somebody causes a company loss, the directors will authorise the company to start proceedings to recover that loss. However, where that loss is caused by the directors themselves, it is unlikely the directors will authorise legal action against themselves. Instead, derivative claims allow a member of the company to step into the company’s shoes and exercise its legal rights where the directors refuse to do so. This is the theory behind derivative claims, and makes them a powerful tool against under-performing and dishonest directors.

How does a derivative claim work?

Someone who wishes to bring a derivative claim must apply to the court for permission for the claim to continue. This permission stage is meant to act as a safeguard against claims without merit, and those made vexatiously. It is therefore a deliberately difficult hurdle to cross. The permission stage is where most derivative claims tend to fail.

To pass the permission stage, the claimant will need to demonstrate to the court that they have a good case. Anything less than this, and the court will dismiss the claim. The court will hear evidence from both parties at the permission hearing, but the courts will try their best to avoid a trial within the trial.

Should the court grant permission, then the claim will continue. Often, the court will offer the claimant an indemnity for their legal fees from the finances of the company. The justification for the indemnity is; because the claimant is bringing a claim on behalf of the company and the company stands to receive the benefit, the company should also undertake the risk by indemnifying the claimant.

The claim will then proceed in a normal manner. It is important to note however that if the claimant succeeds, it is not he who receives the benefit of the award, but rather the company. This is because the claim was brought on behalf of the company.

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